Asia: Diving For Pearls? Steel Your Nerves

The bears prowl, but you can find some bargains

Investors tearing open their Asia mutual-fund statements had plenty to grimace at in 2000--and 2001 augurs little better. Virtually every Asian market clocked double-digit declines last year. Tokyo and Singapore fell more than 20% in dollar terms. In Taipei, Bangkok, and Seoul, the damage was closer to 50%.

It takes an intrepid investor to wade into such a maelstrom, but one with a stout constitution and long-term view can find bargains. Some sectors and countries are best avoided: Dot-com startups and all but a handful of bank stocks look bad regionwide. The Philippines, Indonesia, and Thailand have been disasters. China was Asia's red star in 2000. The Shanghai and Shenzen B shares sold to foreigners rose 100.6% and 42%, respectively.

Overall, Asia struggles with crisis and recession. Japan faces another year of glacial growth, while elsewhere an expected U.S. downturn threatens an export-led recovery. That means "the private consumption everyone thought would kick in [across Asia] is unlikely to do so," says Sani Hamid, a senior economist at BNP Paribas Peregrine Securities in Singapore. South Korea, where annual growth is expected to fall to 5% in 2001 from 9% last year, is especially vulnerable because some 35% of the country's export revenues come from memory chips, computer parts, autos, and mobile phones--the bulk of which are U.S.-bound.

STANDOUT. If such bad news doesn't chill your ardor, you should prospect among credible restructuring plays. Look for tech companies with an edge. The cyclical downturn in the chip industry means investors should avoid even such profitable stalwarts as Japan's Tokyo Electron, Advantest, and Kyocera, which make specialty semiconductors, chipmaking equipment, and packaging. Their shares are down about 50% from their 52-week peaks. HSBC Securities Japan Ltd. equity strategist Gary Evans looks for value stocks pounded in 2000. He recommends Japan's No. 2 brewer, Kirin, at 21 times expected profits, and Honda Motor Corp., and heavy-equipment maker Komatsu. Honda plans 20 new models in 2001. Komatsu sees an 18% gain in pretax profit.

Japan's bank stocks plunged in 2000. But ING Barings analyst James Fiorillo thinks Sanwa Bank and Asahi Bank, which have restructured and sold off billions of dollars in bad loans, can beat earnings forecasts for 2001.

Believers in Korea's tech boom should look at Samsung Electronics, says Chang In Whan, chief executive of KTB Asset Management Co. One of the world's biggest and most efficient memory-chip makers, its diversified chip and high-end consumer businesses cushion it from a downturn. He considers its shares, down around 40% last year, to be a bargain based on projected earnings of $4 billion in 2001.

The Asian standout in 2000 was China. Its opaque companies' shares are illiquid and risky. Still, China should grow 7% in 2001. Analyst Eric Hu of BNP Prime Peregrine Securities Ltd. in Shanghai favors Shenzhen-listed Luthai Textile Joint Stock Co. Its stock rose by about half in 2000, and there's more upside, he says. Hu also likes Shanghai Zhenhua Port Machinery Co., up 39% in 2000. The world's largest crane producer, it expects strong sales growth.

China will lift Hong Kong stocks, which fell 10% in U.S. dollar terms in 2000. Mark Konyn, director of Dresdner RCM Global Investors, likes stock-settlement specialist Hong Kong Exchanges & Clearing Ltd. Listed in June, 2000, its shares should jump 35% in the next 12 months. If U.S. rates fall, so should Hong Kong's, benefiting banks and property companies. Morgan Stanley Dean Witter Pacific equity strategist Ajay Kapur notes that Sun Hung Kai Properties Ltd. (target U.S. dollar price $11, vs. $9.00 at the end of 2000) and Kerry Properties Ltd. ($1.92, vs. $1.27) are nearly 30% below their net asset value.

There are good values in Asia. But bearish sentiment still grips its markets. Investors who jump in now are taking a big gamble.